According to research by Investment Trends, about 20 per cent of advisers’ income stemmed from commissions in 2012, compared with 31 per cent in 2010.

Turning off the tap

Advisers have until July 1, 2013 to turn off the commissions tap but many across the industry have made the transition in advance of incoming legislation, according to the Financial Planning Association of Australia.

“We brought a ban on commissions into place in July 2012," FPA boss Mark Rantall says of the industry body’s remuneration code.

“Theoretically, all of our members (more than 7500 practitioners) are already operating on that basis."

Financial advisers are facing a range of regulatory changes from the FOFA reforms, including the slashing of commission payments from product providers. The bans extend to conflicted remuneration structures relating to the distribution of and giving of advice on investment products, among other changes.

In transition

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“I would estimate that around 70 to 80 per cent of the industry would already be well under way towards that transition," Rantall says.

“Probably in the last year, you’d have seen a lift of 20 to 30 per cent of businesses that have moved towards removing commissions. It takes between six to 12 months to transition your business to a commission-free service model."

Industry and consumer bodies have largely applauded the reforms, which also include opt-in arrangements, statutory duties to act in clients’ best interests and the expansion of low-cost “simple advice".

Questions to ask

While industry commentators argue that the changes will go a fair way to protecting consumers, experts argue that investors still need to still do their homework before appointing a planner.

Justin Hooper, managing director of non-bank-aligned financial planning group SentinelWealth, argues that consumers need to take a proactive approach and “interview" financial planners to assess their professionalism in working to achieve investors’ goals.

Questions to ask include the ownership structure of the business (whether they are bank-aligned or have their own Australian Financial Services Licence) and how the planners’ remuneration packages are calculated and paid.

A last resort

Another key element to consider is whether the planner has a “buyer of last resort" arrangement in place.

These arrangements, many of which were put in place decades ago, mean planners are able to sell their practices to their aligned financial institutions or fund managers if there are no other buyers willing to take the practice off their hands, Hooper says.

Crucially for investors, the sale price often depends on how much business or clients’ funds planners place with these investment managers throughout the years.

“You can sell your business to them for a pre-agreed price. I’m not saying that every single adviser or licensed financial planner has these arrangements in place," Hooper adds.

But if some planners who hold these agreements cannot find a buyer for their businesses, they may be motivated to ensure their clients’ funds are placed in their last-resort buyers’ books to increase the capital value of their practice, he says.

Size of the package

One of the most important elements for investors to consider is the total remuneration package of the adviser.

“The client needs to know exactly how [the planner] gets rewarded, and what behaviour is expected," he adds.